As everyone from David Roodman (on this blog) to the Cambridge randomistas (in the FT) has been saying, Indian microfinance needs reform, not a roundhouse kick to the face. But now the state of Andhra Pradesh has passed an overbearing law which makes it illegal for MFIs to lend to people with multiple loans (which is 70% of rural households), or to lend to members of Self Help Groups without permission. State regulators may also shut down MFIs at any time for vaguely defined “sufficient reasons,” and lenders can only collect payments at government centers – an open corridor for corruption.

The head of Microfinance Institutions Network said: “The bill will make it impossible for microlenders to operate in the state and effectively put us out of business there.”

Soon these ladies will no longer be smiling. Okay, just kidding, I don’t actually know that. But still!

Private microlending in Andhra Pradesh was successful because there was excess demand for credit that government-backed programs and non-profits were not satisfying. But with the for-profits squeezed out, their six million clients will be forced to return to more informal lenders such as village loan sharks.

India was like a Petri dish for microfinance experiments, which meant that initiatives like self-help groups, mobile banking, and MFIs played off each other’s shortfalls. Eventually, the competition between the agents – if mixed with a healthy dose of regulation – might’ve fostered better, more effective systems of microcredit.

But this legislation is a discouraging blow to would-be microfinance entrepreneurs, who’ve been basically told that at any time the government might decide to shut down their businesses – and their ideas.

Investors in for-profit ventures might also be frightened away by the idea of losing money when politicians decide to tighten their grip around microfinance’s throat. In a worst case scenario, the new law could legitimize similar actions by politicians in other countries who are pandering for votes or have their own personal beef with microfinance. Some countries, like Peru, already have stable, well-organized regulation in place, but they’re exceptions.

On the other hand, what happened in India could be a wake-up call, as Tim Ogden argues, about the unrealistic expectations that donors, supporters and governments maintain about microfinance. If that’s the case, then clear-headed thinking about its flaws and benefits could pave the way for better regulation, better financial literacy programs and more effective, more diverse microfinance products.

Next week, Indian politicians plan to ban all Bollywood movies for “sucking the blood from the poor” because they charge for movie tickets.

]]>https://aidwatchers.com/2011/01/killing-microfinance-to-say-they-saved-the-poor/feed/5A Subprime Crisis for the Poorest?https://aidwatchers.com/2010/11/a-subprime-crisis-for-the-poorest/
https://aidwatchers.com/2010/11/a-subprime-crisis-for-the-poorest/#commentsTue, 23 Nov 2010 05:00:02 +0000http://aidwatchers.com/?p=7352Vivek Nemana is a graduate student in economics at New York University and works for DRI.

The impending collapse of the microfinance industry in Andhra Pradesh, one of India’s largest states and a major hub of microfinance, is the ultimate example of a silver aid bullet…not being a silver aid bullet at all. The New York Times reports:

India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.

Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.

Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.

The crisis that began in Andhra Pradesh threatens to spill over to the entire sector, with other states already feeling ripples against the industry. That could trigger a wave of bank defaults nationwide and a rural liquidity squeeze.

Microlending companies say that often where they have investigated suicides attributed to their lending, they have found that microloans were among the smallest of the many problems of the people that have killed themselves.

Up until a month ago, at the biggest lenders, less than 2% of borrowers in the state were missing payments on their microloans. The payment crisis, where people abandoned their repayment schedules, happened only after [Indian politicians] told borrowers they didn’t have to pay. If this borrowers’ rebellion was triggered by dirty lenders, one would imagine the default rate would have expanded gradually before tipping into crisis.

Doesn’t quite sound like the end of microfinance as we know it, but we’ll keep our ears perked. Can micro-lending be both for-profit and sustainable for development?
——————-Image Credit: neytri

]]>https://aidwatchers.com/2010/11/a-subprime-crisis-for-the-poorest/feed/21Lant Pritchett and the hot Indian showerhttps://aidwatchers.com/2010/05/lant-pritchett-and-the-hot-indian-shower/
https://aidwatchers.com/2010/05/lant-pritchett-and-the-hot-indian-shower/#commentsFri, 21 May 2010 04:01:44 +0000http://aidwatchers.com/?p=4498A great story from Lant Pritchett, writing in the comments section of David Roodman’s blog, about how the development industry sets goals and targets. The way we articulate our goals affects how we set about achieving them.

I was living in India and discussing arrangements for household water supply with some development colleagues of mine. After about half an hour of pretty fruitless discussion I said, “Let’s step back. Tell me your long-run vision of the household water sector in India.”

They said “Our vision is that India meets the target that every household lives within half a kilometer of an improved water source capable of providing 40 liters of safe per person per day.”

I said, “I see the problem. My vision of success is that every Indian can take a hot shower inside their own home.” The difference is that one can imagine meeting the first goal “programmatically” or with a series of “interventions” while the latter clearly requires endogenously functional systems.

No one I know wants to have to go to a group meeting to take a hot shower. They want to turn the tap and it works.

Their whole discussion, on whether microfinance is an example of “aid building a thriving, disruptive industry that enriches the institutional fabric of nations” or “an unfortunate work-around for the failures of mainstream financial systems to serve the poor,” is worth reading.